The Value Portfolios I Track

The market has been on a tear, similar to the start it got last January in 2012. The problem is that we’re 16% higher than last January, and valuations are stretched, making life difficult for investors who focus on finding bargains. However, I don’t believe the market is extremely overvalued… at least I’m finding some investment ideas in smaller stocks, and there are still enough cheap stocks out there to allocate some, if not all, of your capital.

Of course, as markets reach all time highs and we currently are in the 4th year of this cyclical bull market, risk levels are certainly higher from an overall market perspective. So be careful, and maybe keep some cash for the rainy day, as it is certain to come soon. As Buffett has said, “cash is a long term call option with no expiration date and no strike price” (paraphrasing). Buffett is of course referring to the “call option” on being able to purchase stocks at bargain prices when Mr. Market gives us the opportunity.

Mr. Market has been in a great mood lately, as the S&P 500 started the year with a 5.2% rise in January (up again today). I’m going to talk more about my Market Valuation Monitor that I keep each month in later posts…. but today, I wanted to list the hypothetical portfolios I track each year. These are passive portfolios based on various valuation metrics. I basically like to keep track of portfolios of 30-50 stocks based on a few different criteria. These are hypothetical portfolios– but they are very investable. If you were to actually invest using these portfolios, you would assemble the portfolios once per year on December 31st and then reallocate one year later, similar to Magic Formula investing for those of you familiar with Joel Greenblatt’s famous method.

Again, these are NOT portfolios I invest in or manage: these are simply a fun way for me to track value portfolios over long periods of time relative to the market. Think of them like miniature value indexes.

Here are the portfolios I track:

50 Lowest P/E Ratios in the S&P 500

50 Lowest P/B Ratios in the S&P 500

50 Highest Yield Stocks in the S&P 500

Dogs of the Dow: 10 Highest Yielding Dow Stocks

Dogs of the Dow: 10 Lowest P/E Ratios of Dow Stocks

The above 5 portfolios are self explanatory. Basically, the S&P portfolios are just the cheap deciles (cheapest 50 stocks by P/E, P/B, or Dividend Yield).

I also track 3 portfolios using screeners made famous (or at least publicly known) by other investors. The first two are from Joel Greenblatt’s screening tool at Magicformulainvesting.com. By the way, as Mohnish Pabrai has talked about, this is a great screener to find individual ideas from. The last one in this group is made possible thanks to the generosity of Toby Carlisle and Dr. Wes Grey at TurnkeyAnalyst.com. Their site has all kinds of intelligent, in depth articles on value and quantitative investing. Their screener is similar to Greenblatt’s, but with a few key differences. Head to their site if you’d like more info. So the three model portfolios I track using the above screeners are:

The remaining four need some brief explanation as well. I use Morningstar screeners for my own investing ideas. Basically, I define the “universe” as domestic stocks of $250 million or greater market cap, with a current ratio of greater than 1, and debt/equity ratio of less than 1. This eliminates highly leveraged stocks and stocks with short term potential liquidity issues. (Quick note: I look at stocks much smaller than this at times, but this is the cutoff I use for these hypothetical value portfolios).

I further divide the main universe defined above (usually around 1000 or so stocks) into “cheap” categories such as P/E less than 12 and P/B less than 1.2. These two baskets have around 150 stocks in them currently. I then take those baskets to come up with the following hypothetical portfolios at the beginning of each year:

Cheap Earnings Universe-Low 50 P/E: This is the 50 stocks in my defined universe with the lowest P/E Ratios.

Cheap Earnings Universe-High 50 ROIC: This is the highest ROIC stocks in the cheap earnings basket (best 50 from roughly the 150 cheap stocks in the basket)

The last portfolio I track is my own screen. Let’s call it the BHI Cheap & Good Scan. This scan takes the defined universe of stocks mentioned above and also requires certain valuation metrics including P/E ratios below 12 or P/B ratios below 1.2, and also has certain quality metrics such as positive ROE in each of the past 3 years, positive revenue growth, and positive EPS growth. This basket had around 65 stocks in it, and I took the lowest 50 P/E ratios to complete the final mock portfolio.

This was a fun project to put together initially, and now it just takes a couple hours of work to alter them each December 31st. All 12 of the portfolios had good months (not surprisingly). One month is far too short of a time to get a realistic assessment of whether these portfolios really outperform, but it’s fun to track them periodically anyhow. 8 of the 12 were up greater than the S&P in January. The portfolios were up anywhere from 4.5% to 9.8%, with the Magic Formula $2 Billion+ portfolio leading the way so far.

This was a much longer post than I initially thought, and might be confusing at first glance, but the objective is to simply track the long term (multiyear) performance of these vs the market. My prediction is that most of these will significantly outperform the S&P, and they are all easily investable.

Hi Philip. Thanks for the feedback. It was more or less just a post to discuss ideas for building passive portfolios and not meant to be a discussion of the individual securities in the portfolios. (i.e. portfolios with a bias toward value that are rebalanced each year). There are about 50 stocks in each portfolio. I do track them on a spreadsheet each year, and I do use them occasionally for ideas, but my main watchlists are more dynamic and change more often.

I appreciate the feedback. I’ll try and see if there is a simple way for me to post the portfolio holdings on the blog. Some of them can easily be found by using Finviz or other screeners (i.e. the S&P portfolios are easy to replicate… just pull up the S&P 500 stocks on Finviz and sort by P/E, P/B, or any other metric to get the cheapest deciles). My own “cheap universe” portfolios are based on my own screens, but I’m happy to share those as well.

I think from the info in the post, you could replicate these using most screeners if you’d like to see the contents. And there will be more discussion on individual securities I’m looking at from my watchlists as I develop this blog.